In this four-part series, I'm taking a look at some of the best investments around for adding yield to your portfolio. In Part 1, I highlighted two top-tier actively managed stock funds that incorporate income generation into their investment approach. Part 2 covered some of the hottest dividend-focused stock ETFs.
Today, I'll turn to the fixed income side of the equation and call out some bond ETFs that any investor can feel confident owning. These are funds that will not only protect your capital and reduce overall volatility in your portfolio, but also provide you with a steady stream of income payments.
Building the basics
Any bond investor should start off his or her fixed income allocation with a solid, well-diversified base of bonds. Since it's incredibly difficult to adequately diversify your portfolio buying individual bonds, broad bond ETFs are an ideal solution. Two of the best options in this space are iShares Barclays Aggregate Bond ETF
Both options provide exposure to all corners of the domestic bond market including Treasuries, corporate bonds, and mortgage-backed securities. The iShares fund charges 0.22% in expenses while the Vanguard ETF will only set you back 0.11% a year, making either fund a solid choice for price-conscious investors.
Your "core bond" allocation should serve as the anchor of your fixed income portfolio. If you're a more aggressive investor, you might devote 5% of assets to a core bond holding and another 5% to other, higher-yielding bond funds. Investors who are still in the working world but that have less than 10 years to go until they retire might want to bump that up to 20-25% in core bond funds with another 10-15% in alternate fixed income funds. So once you've got your base, it's time to branch out and add some more yield.
If you're willing to put up with a little bit more volatility in the fixed income portion of your portfolio, consider adding some exposure to foreign bonds. One good option that combines foreign bond exposure along with protection from future inflation is the SPDR DB International Government Inflation-Protected Bond ETF
Investors who really want to get aggressive in the foreign arena can pick up a bond ETF that focuses exclusively on emerging market debt. Funds like this aren't for the skittish but if you're willing to stomach the volatility, a fund like PowerShares Emerging Markets Sovereign Debt ETF can give your bond allocation a shot of power. As its name implies, government debt of emerging nations is the star attraction here, which means that investors are taking on a lot of credit risk. However, used in small doses, the fund's 5.5% yield may offset some of the inevitable volatility investors are certain to encounter here.
The next level
Folks who are already retired will likely want to focus a decent portion of their bond portfolio on inflation-protected securities to keep their purchasing power from eroding. But more moderate and aggressive types may want to further build out the income-producing portion of their portfolio with high-yield bonds.
One option is a high-yielding municipal bond fund like Market Vectors High-Yield Muni ETF
Another solid high-yield option is the SPDR Barclays Capital High Yield Bond ETF
Stay tuned for the final installment in this series where we'll take a look at some more outside-the-box choices for boosting yield in your portfolio.
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